Companies That Treat Employees Well Are Good Investments

Treating employees well is savvy management, according to “socially-responsible” investors such as Jerome Dodson, founder of the Parnassus Workplace Fund. And for several years, the independent research firm, Russell Investments, has reported that the benefits of happy employees may actually show up in better stock returns.

While it’s possible that companies with good workplaces outperform for other reasons, the result—which is supported by studies of perks such as employee wellness programs—held true again last year.

Russell compared portfolios of companies on the Fortune ranking of the “"Best 100” workplaces to its 3000 Index, which represents about 98% of U.S. stocks. In Portfolio A, an investor bought stocks on the latest Fortune list every year from 1998 through 2010, garnering 11% a year on average. Simply holding the companies in the 1998 list through 2010 (Portfolio B) brought in nearly 7%. Both portfolios beat the index’s 4% return for the period.

Portfolio A *

Portfolio B*

Russell 3000 Index

Performance over 1998Q1-2010Q4

Annualized Return (%)

11%

7%

4%

Cumulative Return (%)

291%

133%

72%

*Invests equal dollar amounts (at the beginning of 1998) in the stock of each of the “Best 100” in the 1998 list that are publicly traded. The portfolio is liquidated at the end of 1998 and the proceeds invested in the 1999 list by buying equal dollar amounts of each publicly tradable firm in the 1999 list. This process of liquidating the portfolio at the end of the year and using the proceeds to invest in the new list of “Best 100” is repeated each year through 2010.

*Invests equal dollar amounts (at the beginning of 1998) in the stock of each of the “Best 100” in the 1998 list that are publicly traded and holds these stocks through 2010.

To test how much of the good performance might be credited to publicity from winning favor from Fortune, the study also took a backward look, calculating the 2010 performance of the 2011 list, with even stronger results for congenial employers. That makes sense, because good publicity might make a company a more popular investment and hence less risky.

Historical Performance of 2011 List of Fortune “Best 100”

Portfolio C*

Russell 3000 Index

Annual Return (%) in 2010

23%

17%

*Invests equal dollar amounts (at the beginning of 2010) in the stock of each of the “Best 100” in the 2011 list that are publicly traded and holds these stocks through 2010. In other words, Portfolio C shows the historical performance of the 2011 list in the previous year.